Why our big upgrades for these ASX stars buck the trend

More than anything, our analysts are focused on the long-term direction of a business and its competitive position.

As a result, one earnings report or set of guidance doesn’t usually lead to a massive change in what they think a business is worth - even when events in the business or industry change what our analysts expect to happen in the near future.

Endeavour (ASX: EDV) announcing a soft start to the new financial year offers a recent example. Our analyst Johannes Faul cut his assumption for Endeavour’s sales growth for 2025 down from 6% to 4%. That’s a 33% decrease, but it’s only one year. His view of Endeavour’s long-term value as a business remained unchanged.

Or consider the case of IDP Education (ASX: IEL).

IDP issued a profit warning in June as government policy changes presented a headwind for its English language testing and migration service businesses. Our analyst Shane Ponraj cut his earnings forecast by 20% for the next three years. That seems like a big deal. But the effect on his long-term estimate of Fair Value? A mere 8%.

Both examples show that our thinking on valuation is impacted far more by our long-term view than by what will happen in the next few quarters.

That’s probably why the most common sentence you’ll see in our research reports during earnings season is “our Fair Value remains unchanged”. It also makes the big upgrades two ASX shares received after earnings even more notable.

Brambles (BXB)

• Economic Moat: Wide
• Fair Value Estimate: $22 per share (up 16% from previous)
• Star Rating: ★★★★

Every few days, most of us go will head to a supermarket and pluck several items from the shelves. But how do the products get to the shelf in the first place? In the case of most food items and consumer packaged goods, there’s a high chance they spent part of the journey on a Brambles freight pallet.

The pallet pool king

Instead of bogging themselves down in buying, maintaining and repairing pallets to transport their goods, most suppliers rent simply rent pallets from pooling companies. Brambles is the world’s biggest pallet pooler, with an almost monopoly in its main geographies. It has 50% of its target market share in North America, 80% in Australia and 70% in the United Kingdom.

This position is largely the result of being the first mover within individual markets, which unlocks a reinforcing cycle of scale growth and cost efficiencies. Once critical mass within a market is achieved, the density of the service center network and relationships with key customers ultimately form high barriers to entry. Meanwhile, entry into new markets makes relationships with global customers even stickier.

The unmatched density of Bramble’s service centre network delivers a material operating cost advantage versus peers. Brambles generally has less distance to transport pallets between customers and a service centre and fewer “empty transport miles”. As transport costs account for around a quarter of Brambles’ costs, this entails a big advantage versus smaller peers and underpins the company’s Wide Moat rating.

Why we upgraded Brambles again after earnings

Morningstar equity analyst Esther Holloway has long thought that Brambles is undervalued. After all, she upped her Fair Value estimate by over 30% in May. Her thesis then was largely the same as it is today – that markets underappreciate Brambles’ ability to reap higher profit margins as it scales and investments in efficiency pay off.

The company’s 2024 earnings, however, suggested that her forecast for improved mid-cycle profit margins at that time was likely too conservative. She also reduced her forecast for Brambles’ spend on pallet purchases and repairs as a percentage of revenue, which could improve the company's returns on capital and profitability.

The latter point has been helped by Brambles customers returning pallets that were hoarded during the pandemic. Meanwhile, she expects investments made in several efficiency projects since 2021 – which include automated pallet repairs, small truck collection of pallets and digitization – to deliver material transportation and repair savings.

As these costs account for about half of the group’s expenses, the effect on profit margins in the future could be significant.

Holloway’s upgraded Fair Value estimate of $22 per share assumes that Brambles can grow its revenue at a mid-single digit clip and gradually improve its operating margins to a midcycle level of 23% from 19% in fiscal 2024. At a recent price of around $17.60, she thinks the shares are undervalued.

WiseTech Global (WTC)

• Economic Moat: Narrow
• Fair Value Estimate: $115 per share (up 15% from previous)
• Star Rating: ★★★

Heading back the supermarket for a second, it’s likely that WiseTech played a role in the transit of some of those goods too.

That’s because WiseTech provides logistics companies with the technology they need to digitize. Its core product suite, CargoWise, has become the best-in-class software solution for international freight-forwarding by air and ocean.

WiseTech’s 2024 results featured news that two more of the world’s top ten freight forwarders had joined the platform, revenues had increased by 28%, and 2025 guidance was stronger than investors had been expecting. In short, the WiseTech’s hefty investments in product development appear to be bearing fruit. And – just as vitally – the company’s dominance of its niche looks to be solidifying.

Morningstar equity analyst Roy Van Keulen continues to see evidence that forwarders using CargoWise are outperforming their peers due to the efficiency and productivity improvements the platform provides. At this stage, he views the question of WiseTech’s terminal market share seems mostly settled to us— he sees a winner-take-all, or winner-take-most dynamic.

The key remaining question, he says, is the terminal market size. Given WiseTech’s strong guidance for fiscal 2025, he increased his assumptions for the size of WiseTech’s market opportunity – and he expects that WiseTech will leverage its dominant position in freight forwarding software into other pockets of logistics like customs and compliance, road and rail, and warehousing.

Switching costs and network effects underpin the moat

Van Keulen’s Narrow Moat rating for WiseTech stems from switching costs and network effects in the CargoWise software suite.

Implementing CargoWise requires a heavy investment of time and resources to map business processes, integrate technologies and train client team members. Going through all of this again to switch providers holds little appeal to clients.

CargoWise’s deep integration into vital workflows – which normally increase in number over time as clients enjoy the efficiency benefits – also makes it mission critical to many freight forwarders. This further puts them off switching software provider, as doing so brings the risk of a hitch or delay bringing substantial business disruption with it.

Van Keulen says these switching costs are evidenced by CargoWise’s customer retention rates of over 99% per year despite material price increases. And he also sees evidence of network effects in the CargoWise product suite.

CargoWise’s clients select and co-ordinate the operators of freight assets such as ships, trucks and warehouses to move goods. When asset operators are integrated with CargoWise, freight-forwarders can track the movement of shipments across the supply chain automatically rather than manually, leading to substantial labor cost savings.

As a result, freight-forwarders are incentivised to use asset operators that are integrated with the CargoWise platform. Hence, asset operators are incentivised to integrate with CargoWise in order to win business. This in turn increases the pool of potential asset operators that freight-forwarders can work with using CargoWise, and so on. You can read more about network effects and ASX shares that benefit from them here.

Shares look fairly valued

Van Keulen’s upgraded Fair Value estimate of $115 per WiseTech share assumes the firm can grow revenues at 22% per year for the next decade, driven primarily by sales growth in the CargoWise product suite.

Van Keulen also thinks the company can keep a higher percentage of its revenues as profits over time, thanks to its ability to raise prices and potentially taper down development spending. At a current share price of $117, the shares trade roughly in line with Van Keulen’s valuation.

Remember that an individual share or investment should only be made as part of a broader investment strategy. Follow this step-by-step guide to make yours.

More ASX earnings season articles:

• Investors are too optimistic about this banking growth story
  
  
• A wrap of last week's ASX earnings action
  
  
• Our view on three ASX earnings season winners
  
  
• Two of Morningstar's best ASX ideas report

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.